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PIXY: ShiftPixy Still Showing High Growth and Improving Margins in Q3 FY2019

By Lisa Thompson



While toxic financing has knock down the stock price, ShiftPixy (PIXY) still reported a solid quarter amidst all the drama from the recent convertible note transaction. For the first time ShiftPixy beat our gross billings number, coming in at $94.2 million compared with $60.2 million in FYQ3 2018, up 57%. Revenues were also strong at $14.3 million, up 53% year over year and inline with our estimates. Incredibly despite this performance, the company is trading at $14 million enterprise value despite being at a $57 million revenue run rate with improving margins and growth over 50%.

Worksite employees rose from an average of 7,250 employees for the three months ended May 31, 2018, to an average of 10,860 employees in this year’s quarter, up 50%. The company indicated in its 10Q that it has already added 17 clients with 6,600 worksite employees. At quarter end there were 12,300 worksite employees. Adding that to gets us to 18,900. We believe this does not include churn in the client base, which lowers the total. These additions represent an annual gross billings value of $32.5 million. The company expects that this revenue may generate an additional of $1.1 million in quarterly gross profit. Cash breakeven is expected to be at approximately 25,000 worksite employees.

Gross margin dollars increased 75%, and the gross margin percentage also increased from 16.5% to 19% in 2019. Gross margin was helped by economies of scale from workers’ comp as well as the good trend of its loss ratio on its new deductible program. We expect margins to continue to improve sequentially throughout the calendar year. Currently the company’s baseline engagement is now at 2.5% of payroll stack for service fees and once the new features and mobile technology is released and available to customers, ShiftPixy intends to increase this base line engagement to 5% of payroll stack, effectively doubling margins.

View Exhibit I

The operating loss was $3.1 million versus $1.8 million loss a year ago.

Total other income was and expense of $1.9 million. Interest expense was $4.3 million from amortization expense related to the debt discount and debt issuance costs related to the March 2019 and June 2018 financings. Only $81,005 of interest was paid in cash. Two other charges were in other income; a non-cash $2.3 million inducement loss from debt and a $4.7 million non-cash gain on the change in fair value of the derivative and warrant liabilities.

With no taxes paid, the company reported a loss of $5 million versus a loss of $1.8 million a year ago or a loss of $0.14 per share versus a $0.06 per share loss. On a non-GAAP basis the loss per share was $0.06 flat with a year ago. In this number we have taken out stock based compensation and one-time expenses. Average shares outstanding for the quarter were 34.5 million, up 20% from a year ago. Fully diluted shares using the treasury stock method were 44.5 million versus 28.8 million, an increase of 27%.

Dispute With Its Convertible Note Holders

ShiftPixy has been the victim of toxic financing, which has knocked down its stock price and greatly increased dilution. This has been driven by its new convertible note holders who have the incentive to drive down the stock price as they can convert more shares at a lower price down to floor of $0.31. On June 20, 2019, one note holder, Alpha Capital Anstalt, submitted a conversion notice to convert $310,000 of the principal of the note owned by Alpha into one million shares of common stock at the applicable conversion rate of $0.31 per share. The company refused to honor the conversion request. On June 27, 2019, ShiftPixy informed its convertible note holders that it would cease honoring conversion requests of those notes, forcing a voluntary default of the notes. The company believes that the conversions demanded and subsequent sales of the its common stock by the holders of the notes put extraordinary pressure on its stock price, which led to listing deficiency notices from NASDAQ.
Management is pursuing a renegotiation and amendment of the notes with the note holders in an effort to avoid litigation. The company requested to amend the terms of the notes and related agreements to remove the conversion features, and revise the cash amortization schedule to be more in alignment with the its improving cash flow, among other items. However on July 3, 2019, Alpha filed claim No. 19 CV 6199 in the United States District Court, Southern District of New York seeking preliminary injunctive relief against the ShiftPixy to immediately deliver one million shares of its common stock and to honor all future conversion requests duly submitted by Alpha in accordance with the terms of the notes. A court date is set for today, July 24, 2019 at 4:15 p.m. EDT. If the Alpha Capital cannot prove it has suffered irreparable harm, then it will need to file a suit and it would take at least a year until it is on a docket. If it can prove harm, ShiftPixy will appeal delaying the outcome for a few months and buying time to reach cash flow breakeven.

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